In what appears to be the first substantive dispositive ruling on a COVID-19 related business interruption insurance claim, a Michigan court has dismissed an insured’s business interruption claim, finding that the insured did not suffer a direct physical loss and no insurance coverage exists for the insured’s claim.

On July 1, 2020, Judge Joyce Draganchuk in Ingham County, Michigan dismissed a claim of first impression, siding with an insurer’s decision to deny business interruption coverage. The case centered on one key provision in the insured’s policy: “Direct physical loss of or damage to the [insured’s] property” triggers the application of business interruption coverage.

Nick Gavrilides is the owner of two restaurants in Lansing, Michigan. His insurer Michigan Insurance, a subsidiary of Donegal Group Inc., denied his $650,000.00 claim. Gavrilides’ asserted his business interruption coverage should include COVID-19-related losses.

During a virtual hearing conducted by the court, Michigan Insurance argued the policy did not cover losses stemming from COVID-19. It argued business interruption coverage is triggered by an event that actually alters the structural integrity of the property, which did not occur. Gavrilides, on the other hand, argued non-destructive losses are covered by the policy.

Notably, Gavrilides did not allege his property had been damaged or lost but instead that Michigan Governor Gretchen Whitmer’s stay-at-home order interfered with his use of his restaurant business. In response, Michigan Insurance pointed out the policy was not triggered by loss of use of the property but rather by the loss of or damage to the physical property itself. The insurer maintained, “[T]he insured’s property today exists in the very same condition as [it] existed the day prior to the effective date of the stay-at-home order.”^[1] Michigan Insurance’s legal argument relied on standard rules of contract interpretation. Words are not to be added when the language of the contract is clear. Adding the word “use” to the key provision and implying the loss of use of the property would trigger coverage would deviate from this rule; it would be a violation of settled law.

The Michigan court agreed. Judge Draganchuk ruled verbally during the hearing:

[I]t is clear from the policy coverage that only direct physical loss is covered. Under their common meanings and under federal case law … direct physical loss of or damage to the property has to be something with material existence, something that is tangible, … something that alters the physical integrity of the property. The Complaint here does not allege any physical loss of or damage to the property.^[2]

In other words, the court ruled that Michigan Insurance’s denial of Gavrilides’ claim was proper because COVID-19 did not affect the actual, tangible structure of his restaurants, and as such, there was no physical loss of, or damage to, the restaurants.  Similarly, Judge Draganchuk also dismissed Gavrilides’ claim for coverage pursuant to the civil authority provision in the policy, because this provision also requires the physical loss or damage to trigger coverage.

Exclusionary language may also have barred the claim had the court found that the alleged loss fell within the insurance clause of the policy. The final nail in the claim’s coffin was a virus exclusion contained in the policy, which stated the insurer “will not pay for loss or damages caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.” Counsel for. Gavrilides pointed to the stay-at-home order, not the virus, for the loss of the use of the property, but Judge Draganchuk was not persuaded. 

The Gavrilides decision is the first of its kind to dispose of a business interruption claim, and the stakes are high. More than 450 cases like Gavrilides’ have been filed in state and federal courts across the country, and Congress, legislatures, and regulators are grappling with pressures to retroactively rewrite existing insurance policies to cover COVID-related business losses. For policies similar to Gavrilides’, Judge Draganchuk’s order may set the stage for courts to follow.

This article features contributions from Lauren E. Cyphers.